Debating the “Default Option”

This post was written by John McHale

As linked to by Philip below, Ashoka Mody reignites debate on the default option.   His views must be taken seriously given his vast experience on economic crises.   But it is important to put his proposals in context.   They are largely aimed at European policy makers.   A large private/official-sector debt write off, followed by a commitment to provide necessary funding support as countries moved in a phased way to the low debt/balanced budget model common for states in the US, could well be a route out of the current crisis.

The problem is that this option is not on offer.   In these circumstances, the more a default option is kept on the table as a possible future choice, the harder it will be to regain creditworthiness.   Who would want to buy Irish bonds now if they stand a significant prospect of facing write-downs on their investments in the future?    To the extent that expectations of default remain high, the concern is that it would be less than the orderly/supported model described by Ashoka.   The evidence from past defaults is that they come with large output costs.   The fear of the crisis entering a new virulent phase would undermine confidence and growth in the present, making it harder to stabilise the vicious feedback loops between the banking, fiscal and real sectors. 

An implication is that it is important to move decisively in one direction or the other.   Either get on with the type of solution proposed in the article or take the default option off the table to the maximum extent possible.   With the first option not actually available, the Irish government have moved in the second direction – with reasonably good results in terms of the restoration of creditworthiness.    This option can only work with a strengthened institutional structure for EMU – Patrick Honohan’s euro 2.0.    A core component must be a strengthened lender of last resort for sovereigns backed by fiscal rules that limit risk and moral hazard.   The ECB’s OMT programme – however rationalised by the ECB itself – is an important step in this direction, but more needs to be done.

33 Responses to “Debating the “Default Option””

  1. DOCM Says:

    Unfortunately, the dreaded OSI has entered the vocabulary, at least as far as Greece is concerned. (Hat tip Eurointelligence).

    http://www.spiegel.de/politik/deutschland/oeffentlicher-schuldenschnitt-fuer-athen-kaeme-deutsche-teuer-zu-stehen-a-867011.html

    The impeccable logic of your contribution may have difficulty in finding an audience in Ireland, driven as the debate is by the simplistic “why not us too?” alternative.

    Or maybe not?

    http://www.irishtimes.com/newspaper/finance/2012/1114/1224326573744.html

  2. bazza Says:

    @John McHale

    “the more a default option is kept on the table as a possible future choice, the harder it will be to regain creditworthiness.”

    The problem with this statement and your argument is that creditworthiness is not an end in itself.

    With the OMT programme in place, it is very likely that Ireland will exit the current bailout. However, the improved “creditworthiness” delivered by the OMT leading to sustainable borrowing in the bond market is a very different thing from economic recovery.

    Improved creditworthiness is will not change the underlying problems in the economy one iota. We have been able to borrow at reasonable rates for the last few years, but where has that got us? Nowhere!

    As I have argued before and as is alluded to in the in the IT article, a sine qua non for recovery is a reduction in the overall debt burden. It is well documented that high debt burdens will retard growth now, reduce growth in the future and delay recovery for a generation.

    Surely this is very obvious? Why is this so hard to understand?

  3. Kevin Lyda Says:

    “Either get on with the type of solution proposed in the article or take the default option off the table to the maximum extent possible.”

    Every loan has the option of default. Always.

    Honestly the more I read it, the more the sentence reads as if it were written by a child. Yes it’s important to make a decision, but the idea that the course we are currently on is being damaged because we have other options is just silly. We always have options.

    If we default, we can always choose to send a financial bonus to those we default on later if the economy improves. In fact based on how we do tax cuts that favour the wealthy in this country when times are good, we almost definitely will. So even if we choose the default route, we have the option of changing our mind there. Does that harm the default option?

    This idea that “we must all commit 100% to my solution or it will not ever work” is the logic of a five year old. We *always* have options, we can always choose a different way. If your solution requires blind, unquestioning obedience to be successful, your solution will not be successful.

  4. Yields or Bust Says:

    @DOCM

    The new BOI investors can no doubt look forward to another 100% full payment on their un-guaranteed bet in three years time when things go tits up as they likely will unless the austerity bus changes course - so what’s new?

    @JMcH

    Greece would be well down the path to full stabilisation had the initial PSI being significantly bigger than it transpired to be. No ECB or IMF loans took a hit first time around remember so it really was debt forgiveness light in many respects.

    The lack of shock and awe in the original design in Greece has meant that the debate has had to start all over again. This needn’t have been the case but once again the Govts were captured by the banks bluff and once again they fell for the lie.

    Whilst I do understand the logic of your argument, I disagree with it vehemently. There are always choices. The choice currently chosen means that the pain of the policy will fall disproportionately on the little guy and the hedge funds etc will be protected from losses. This may help to solve the credit risk from the sovereign’s perspective but does little to solve the employment and growth prospects of the people and the economies generally. It hasn’t worked thus far.

    I go back to the basics - when you place a bet the prospect of losing simply has to form part of the risk return dynamic otherwise the entire capitalist theory is turned upside down. A lot of strange things have gone on over the past five years but one thing, which is not open to much debate, is that when properly regulated capitalism generally works better than most other regimes. The experiment that the EZ design teams have ventured down clearly tells us that the avoidance of losses on financiers that should have taken such hits has disastrous consequences for a much broader cohort of people than should ever had been the case. This is now indisputable.

    We may indeed have had to endure a period of economic mayhem had the losses fallen where they were rightly destined to fall in the first instance - well so be it. Many nations have had to endure periods of economic mayhem and still managed to come through with a sense of fair play and plagues endured on all guilty houses. This is not the historic record of this economic crisis. Here those in a position to take losses were cushioned and hugged and those least able to bear the burden were passed the bill. In supporting that policy choice as you do forfeits your right in my view to determine and advise on how those losses are expected to be repaid - one can’t have it both ways.

  5. Stephen Kinsella Says:

    Hi John,

    Re your second paragraph, I don’t see Mody as calling for default on sovereign debt in the Irish case. I think he’s focused on the ELA/Promissory note and/or ESM-ready bank recapitalisation funding issues, which are slightly different in nature from pure sovereign debt. And are seen as such by the markets if the implied bid yields on our bonds post June 2012 summit is to be believed.

    A strong case can be made through the NTMA who market our debt that this in fact pushes our sustainability concerns away from, rather than back onto, the table. See their investor presentation, slides 70 and thereon for a possible line in this direction. http://www.ntma.ie/news/ntma-presentation-for-institutional-investors-july-2012/

  6. BeeCeeTee Says:

    I think it would be more accurate to say that while the default option as described by JMcH is not on the table, neither is a really credible alternative path towards sustainable finances. JMcH has himself previously described a credible path, and it is just as clearly off the table as default.

    Default will not go away as an option until a real alternative path to fiscal sustainability becomes available, which will include the economic equivalent of large debt write-downs even if they are not labelled as default. Ashoka Mody is absolutely right to force this issue to the fore.

  7. jeromek Says:

    John

    I accept your point is well made and in fairness you consistently take time to write considered articles on this subject.

    Nevertheless, there are strong cases for restructuring.

    Firstly, by reducing overall debt that is dumped on the Sovereign, we make ourselves more attractive to new lenders. Clearly differentiating the current account deficit vs bank “debt” is both achievable and can be reinforced by proper PR and communication. Provided we cut current spending to better match our tax take, getting funding would be possible.

    Secondly, Are we not talking about debts of one private bank whose directors activities are being currently investigated (admittedly at a glacial pace) by fraud squad?
    Were their annual reports for several years not works of fiction signed off by directors with fiduciary responsibility and (their auditors)?

    On this basis are the people of this sovereign country not entitled to say, based on the facts uncovered to date, payments are suspended. A referendum or vote on this would be far more relevant to the people than some vague children’s referendum with unclear objectives - and would give basis for our leaders to say their hands are tied….

    Based on international newspaper coverage, we have at last started to educate our international peers as to injustice of the debt handling - and therefore I think it is time to call the ECB’s bluff on this. Have they any moral basis now for cutting off funding to our remaining zombie banks…

    Thirdly, there is little appreciation still outside of Ireland for the unprecedented level of private debt which younger mortgage holders are carrying for the next 25 to 30 years. These people are expected to pay these debts on overpriced houses and apartments without debt forgiveness and on top of this, they and their children will cover the unpaid developer debts who sold them the overpriced houses via their taxes….something has got to give.

    Of course as I (and Morgan Kelly ;-) have pointed out before, your hand is weakened considerably when you need to borrow to pay your privileged class some of the highest wages in Europe….from a senior civil servant’s point of view, “default” as you call it or “rejecting to pay someone else’s debt” as more correctly defined, would be financially painful….this is understandable and who among us could honestly say we would act differently if in the same place…but the status quo is worse, we will be debating this in another 4 years of stagnation and beyond….at that stage someone might have woken up to the PS pension ponzi/deficit that is accruing.

  8. Jules Says:

    We have been completely let down by our governments for almost a decade now.

    Micheal Noonan stated yesterday that we did not “pay” the 3.4 billion note last year to the Robber Baron Bank. We DID, we transfered the debt from the ECB to Bank of Ireland from an institution we “probably” didn’t have to pay back to one we “probably will”. You could argue that it was not a cash transaction but most govenments payments are funded by debt rollover etc.. He may has well have argued that you don’t have to pay for XMas if you use your credit card and keep rooling it over at the end of the month. That is the quality of finance minister we have. The previous minister signed a 100 bn check after a few hours of consideration after he had been “strong armed” by the ECB and a couple of banksters.

    Why can’t we have a referendum Californian style that limits for a period a 4 years.

    (i) All public salaries to 150,000 Maximum (including semi states and state owned banks)
    (ii) Tax relife on private pensions to 5,000 per year
    (iii) A stipulation that the govenment cannot not “take on” the creditors of a private institution of more than 0.5 billion without a further referendum (stopping strong armers of all types in their tracks)

    That referendum would be passed in the morning by 80% of the public and save the government 2 bn a year and probably save the country from the enevitable default. Will it happen NO. Why we have mice not men in Government. They do not want to bend to the democratic wishes of the populace - They want to line their own pockets and cash in their outrageous pensions - Why can’t we get Californian Governor Gerry Brown, Morgan Kelly or even Micheal O’Leary as taioseach.

  9. John Foody Says:

    @ All

    Say we consider the cost of bailing out the financial system by the citizens of this state, X, against the finacial cost to the citizen by letting the costs fall where they should have, Y.

    Say now we somehow know the exact costs of both X, the grossly unfair option and Y the fair option.

    Now say X is slightly cheaper than Y, which should be implemented? I mean to ask is there not a value on fairness, or to put i another way should it be a matter of cost alone?

    I don’t know about you guys but my sense is the decision to support the financial system at the expense of the citizens of this country, and inparticular it’s young people, has had the effect of making a generation of an entire nation feel like helpless patsies. How do you price that, or indeed can you price that?

  10. John Foody Says:

    Also on the PN arrangement. I have to say I’m starting to fall on the Brian Lucy side of the argument. Simply don’t pay it, no 40 year term, just don’t pay it.

    I know the ECB is keen to show the Bundesbank it’s not about to finance governments etc. However if we simply say we’re not paying it, accept there’s a risk of them puling the liquity plug but try to mitigate it by articulating our case to our European partners, i.e that the ECB may have acted illegally in forcing us to underwrite the banking system etc etc.

    The other Eurozone governments don’t have to be seen by their electorates to put their hands in their pockets to give us debt forgiveness. However if the liquity stops and we’re forced out they most certainly will incur losses and they’re exposing themselves to whole lot more unknown unknowns.

    Are the odds of success in such a stategy not waited in our favour?

  11. Paul W Says:

    @ Bee
    “I think it would be more accurate to say that while the default option as described by JMcH is not on the table, neither is a really credible alternative path towards sustainable finances. JMcH has himself previously described a credible path, and it is just as clearly off the table as default.”
    +1

    (A) However, I think e.g. the PNs offer opportunity for some creative ‘default’ strategy. Write-off here hurts who? It’s a drop in the ocean re ECB printed money. A direct Greek style write-off of Official support or market debt would be far more sentitive. I am sure that other similar alternatives can also be developed e.g. debt to equity, etc.
    (B) However, that’s not going to be enough by itself. The current deficit needs to be closed out also, at a minimum.
    A trade off of (A) and (B) would be much more acceptable again for Ireland’s creditors /markets. The overriding approach is to demand restructure but offer an acceptable offset. Again (and again, etc), anyone who thinks that our Northern European brethern will willingly and unilaterally write off Irish debt is deluded.
    However, (B) needs strong leadership and integritty & fairness in burden sharing & implementation. All presently lacking.

    @ JMcH
    “……the Irish government have moved in the second direction – with reasonably good results in terms of the restoration of creditworthiness. ”
    Do you really believe that? I also vehemently disagree. What reaonably good results are you alluding to? My view is that Ireland’s current ’stability’ is merely a product of the country being a benign beneficiary of current EU /IMF policy proxy protection. If sentiment re support of the PIIGS ultimately changes, the fall for Ireland will be bad.

    “Who would want to buy Irish bonds now if they stand a significant prospect of facing write-downs on their investments in the future?” That misses the point, surely. The write off of existing debt will affect the existing holders, making it much more attractive for future holders to hold Irish debt as the futher default risk is mitigated /eliminated although the Greece precedent is not very comforting - History has demonstrated that but I am assuming a sufficient overall write off along the lines espouised by Colm McCarthy in the past i.e. involving a real and meaningful separation of the Sovereign Debt from the historical but now imputed bank debt element by restructure /write off of the latter. But this ‘debate’ just keeps going round and round…..the expectation of default remains high because of the (increasing) high levels of debt. What’s so difficu;lt about that to understand?

    “Either get on with the type of solution proposed in the article or take the default option off the table to the maximum extent possible.” Admirable words.

  12. Paul W Says:

    And by the way, don’t blink when across the table from the creditors. They will only blink when they realise Ireland is actually serious.

  13. Fiatluxjnr Says:

    @DOCM
    From your IT link
    “Minister for Finance Michael Noonan said it was “an important milestone on the path to full independence for our banks” and more evidence of banks returning to normal.

    “It is a step towards their full return to the wholesale markets, independent of State support,” he said.

    Investors lending €1 billion in unguaranteed loans to an Irish bank was “important in decoupling” the State from the banks, said the Minister.

    The bank said the debt issue was “a significant vote of confidence by international bond investors” and “an important step” towards a more sustainable funding position.

    What a load of claptrap.

    The Bonds are fully secured loans…secured on the homes of Irish people who are being screwed by increasing rates from the pillar banks.
    Anyone seen the documentation? It would be interesting to see the profile of the loans and the cost to the borrowers.

  14. OMF Says:

    I just… I just can’t deal with how wrong the worldview of this post actually is. I’m going to omnislash it.

    The problem is that this option is not on offer.

    Mostly because it hasn’t actually been requested yet!

    In these circumstances, the more a default option is kept on the table as a possible future choice, the harder it will be to regain creditworthiness.

    But you can’t regain creditworthiness without defaulting in some form. Unless a magic fairy is going to come along and wish you some money.

    The fear of the crisis entering a new virulent phase would undermine confidence and growth in the present, making it harder to stabilise the vicious feedback loops between the banking, fiscal and real sectors.

    But we don’t have confidence and growth in the present! We have uncertainty and recession. The vicious feedback loops are already in operation, albiet in glacial time. Personally I don’t see a problem with thawing things out and getting this crisis over with.

    Either get on with the type of solution proposed in the article or take the default option off the table to the maximum extent possible.

    I think that, given the state of the country, this latter proposal would be an act of insanity.

    With the first option not actually available, the Irish government have moved in the second direction – with reasonably good results in terms of the restoration of creditworthiness.

    “You’re not fooling anyone you know.”

    A core component must be a strengthened lender of last resort for sovereigns backed by fiscal rules that limit risk and moral hazard.

    If that really is the government’s strategy then Ireland is truly undone. Hoping that Santa will save you is not a policy!

  15. DOCM Says:

    @ Flj

    Either you can raise money independently in the bond markets or you cannot. I am only concerned with this reality, not whatever gloss the MOF or anyone else puts on the bond issue by the BOI.

    Google Translate will give the gist of the Der Spiegel article I linked to above. The reality of the situation - as viewed by the German government and those of other creditor countries - is that, if the burden of bank debt is to be lifted from the shoulders of Irish taxpayers, it has to be placed on the shoulders of the taxpayers of their countries. Whether the situation is fair or unfair is irrelevant to the political conundrum that is posed.

  16. David O'Donnell Says:

    @DOCM

    This Munster is not a satellite of Germany! Stand up and Fight.

  17. OMF Says:

    Either get on with the type of solution proposed in the article or take the default option off the table to the maximum extent possible. With the first option not actually available, the Irish government have moved in the second direction – with reasonably good results in terms of the restoration of creditworthiness. This option can only work with a strengthened institutional structure for EMU – Patrick Honohan’s euro 2.0. A core component must be a strengthened lender of last resort for sovereigns backed by fiscal rules that limit risk and moral hazard.

    The more I reflect on this paragraph, the more unnerved I become.

    Reading this as an assessment of the government’s debt strategy so far, and coupled with attitude of the government to our spending and debt levels, it seems clear to me that this county’s strategy is to plead like a heroin junkie for just one more hit.

    We haven’t reformed ourselves. We haven’t cut spending, or raised taxes. We still go around with the same ragged and failed policies and people who got us hooked on credit in the first place. We won’t clean ourselves up, we won’t say no to the dealers(Troika), we won’t stand up for ourselves.

    All we’re going to do is get on our knees and plead for just one more hit. One more big loan, just to get back the sovereignty, just to get back to the markets, just to get the loan sharks off our back. Just one more hit. “Giz’us a low interest loan! Juust a smmall one! Please!!”. Ireland is not going to fight to get better. We’re going to put up with anything, and take any deal that is tossed to us no matter how meager. It’s clear as day to me.

    I understand now why there are so many heroin addicts on the main streets of Dublin. They are role models for our governing classes.

  18. Paul W Says:

    @ OMF
    +1
    Insolvency generally means inability to repayor to refinance under any reasonable assessment (absent ‘Santa’) . Official Ireland still appears to think that it is a liquidity issue…..or that the EU /IMF will do a ‘Santa’ ultimately. Deluded.

    It is true though that Ireland can regain creditworthinness, but not by doing as little as it has to help itself thuis far and certainly not by pursuing more of the same. And it is difficult to see any reasonable meduim term /timely solution without some debt relief. If one let’s enough time pass, by definition the probability of that predictable economic ‘earthquake’ increases. Just as the US is flirting with its fiscal cliff, calamity can happen for Ireland. Then it will be too late.

    @ JMcH & co. Sorry to say that “you were told so” in the Fiscal Compact debate. Now you appear to be realising that the bullets are running out…Yet, Official Ireland still lacks the honesty and balls to change /materially adjust tack. Too much self interest involved e.g. MNC sector worried about the tax rate, public service doggedly clinging to Croke Park, etc. To hell with the ‘losers’, ‘I’m alright Jack’. Round and round and round…..

    One thing I agree with is Mr. Mody’s recognition that the Greek precedent provides a useful template for a debt restructure programme for Ireland. This has also been pointed out before, ad nausea.

  19. BeeCeeTee Says:

    Issuing covered bonds is no more “raising money independently” than selling off the equivalent part of the mortgage book would be. It actually tends to make the institution less creditworthy, because it reduces the assets against which general creditors and subordinated bond holders have a call.

  20. Joseph Ryan Says:

    @Fiatkuxjnr

    re: Ir Times report on BOI bond sale
    “What a load of claptrap.”

    +1

    Not only are the bonds covered by Irish residential mortgages but because of that cover, there is less in the pot for depositors, if the bank goes belly up.

    The reality is that ordinary retail depositors have been queue jumped, once again’ in their security, through the issue of this covered bond.

    The Irish Times reporters, who presumably know this, should at least attempt to report the truth.

    ““We have prepared for and are ready for the expiry of the ELG,” said the bank, which spent €221 million on guarantee fees in the first half of 2012, almost a quarter of the bank’s total income for the six months.”

    BOI, pays ELG for deposits over €100,000. It wants rid of this.
    But the State guarantees all BOI deposits under €100,000, free of charge.
    Now, how about that generosity towards what Richie Boucher calls commercial organization.

    The Irish Times reporters, who presumably know this, should at least attempt to report the truth. I never buy and rarely read that paper now.

  21. David O'Donnell Says:

    What’s a piddly little 64 mere billion?

    http://www.spiegel.de/international/business/bild-866763-425314.html

  22. Fiatluxjnr Says:

    @DOCM

    My point is that it’s not independent funding in the bond market. It effectively selling I billion of assets (if things deteriorate) in a company with a market cap of 2.8billion.
    As regards the Der Spiegal article, as you say…someone has to pay. Bet it’s not Angela’s taxpayers any time soon.

  23. Shay Begorrah Says:

    It seems from the Financial Times that the European Commission is starting to realize its fight with reality might not be going so well. Where is their Box 1.5 now, eh?

    No further austerity for Spain, says Rehn

    It took riots, coordinated international protests and appallingly bad economic data but the march of the neoliberal fools has suffered a setback. Lets take advantage of their disarray and move on the IBRC.

  24. DOCM Says:

    @ Flj

    I take your point.

    On the issue of who will pay, what is certain is that no country in the EU at present sees itself other than as the aggrieved party. That is bad news!

    Bloggers generally may be interested in the leaked Van Rompuy draft conclusions on the multi-annual budget) (embedded in this Euractiv France link).

    http://www.euractiv.fr/economie-et-finance/les-propositions-de-van-rompuy-pour-le-budget-2014-2020-17210.html

    One can be certain that the cuts proposed in relation to agriculture will cause the usual Pavlovian reaction in Ireland. The real issues are, however, in the revenue not the expenditure side of the budget i.e. there has first to be agreement on how the bill will be paid before there can be decisions on the choices from the menu cf. paragraph 108 at page 43.

    It is a good attempt by Van Rompuy to find a middle ground i.e. there is a degree of pain in it for all involved while still maintaining the political deal established in 1984 in Fontainebleau with the UK which has to stay in place as long as France and Germany are in agreement that the CAP should absorb some 40% of the overall budget. Any other outcome is politically impossible for Cameron. The other countries are not equally constrained.

    The European Parliament, as is its wont, is staggering around like a drunk at a wedding contributing disruption and little else.

  25. DOCM Says:

    @ All

    The Telegraph jolts into action!

    http://www.telegraph.co.uk/news/worldnews/europe/eu/9679833/EU-tries-to-grab-6bn-from-Britains-EU-rebate.html

    On the points raised, there never was any justification for expenditure in the new member states on rural development acting to increase the UK rebate. However, the idea of the UK contributing to its own rebate seems a bit unusual, to say the least. The fundamental concession is that the rebate mechanism be allowed to continue at all.

    This topic may seem a bit divorced from the subject matter of this thread but, given the timing of the two European Councils between now and Christmas, not to mention the spat with the IMF regarding Greece, the issues are becoming jumbled up. A failure to agree on the minor sums, relatively speaking, for the long-term budget cannot but have a very negative impact in other areas including the future trajectory of the euro.

    The pain for Germany, Sweden and the Netherlands is that they would get only a flat sum rebate unrelated to the size of the contribution they must make to the UK rebate. The pain for Austria is that it would no longer benefit from any rebate (it being doubtful if it ever should have) and there is no mention of Denmark (which has threatened to veto the budget if it does not get a concession in the amount it thinks the country is entitled to).

    How France, Italy and Spain might react to being left with the bulk of the cost of the UK rebate remains to be seen.

    None of the other countries seem to have issues that would prevent their eventual acquiescence in a deal.

  26. DOCM Says:

    @ All

    FYI

    http://www.spectator.co.uk/features/8760041/merkels-sovereign-remedy/

    A very interesting article which is strong on analysis but nevertheless comes to the wrong conclusion. There will be no clash in relation to principle between the UK and Germany because the former is being given every option not to join the fray by the latter if it chooses not to e.g. the Van Rompuy proposals on the eventual use of the proceeds of an FTT restricted to a number of countries which would replace their GNP based contributions to the EU budget.

  27. David O'Donnell Says:

    fyi The Greek Gougers

    11/15/2012
    ‘Horrible Citizens’
    The Life of Greece’s One Percent

    By Julia Amalia Heyer

    The Greek economy has been tanking for years now as the country struggles to balance its budget by imposing deep austerity measures. But the country’s richest residents haven’t noticed. Many aren’t taxed at all, and some of those that are prefer to dodge their obligation to the state instead.

    [...] … there are a number of lists circulating in Athens including names attached to unfathomable sums of money. These belong to politicians, actors and businesspeople, all of whom supposedly have accounts at the Geneva branch of the British bank HSBC. Experts estimate that Greeks have up to €170 billion in assets safely stored away in Switzerland.

    http://www.spiegel.de/international/europe/the-crisis-has-yet-to-hit-the-wealthiest-greeks-a-866693.html

  28. David O'Donnell Says:

    CARTOON OF THE DAY

    CELEBRATING THE EU’S NOBEL PRIZE !! (Hibernia supinely dozed through ….

    http://www.presseurop.eu/en/content/cartoon/3036711-voice-people

  29. Bond. Eoin Bond Says:

    @ Fiat/JR/BeeCeeTee

    “The reality is that ordinary retail depositors have been queue jumped, once again’ in their security, through the issue of this covered bond.

    The Irish Times reporters, who presumably know this, should at least attempt to report the truth.”

    This is actually incorrect. BOI will be simultaneously retiring a similar amount of covered bonds currently used as collateral at the ECB refinancing window. The new issue is a direct substitution for these bonds (which are ’self held’ by BOI), and so the unencumbered assets of BOI, which would be used in a bankruptcy situation (ie to pay back depositors), remains unchanged. Without being harsh, it might be useful if people only commented on things they actually understood. Hopefully this has cleared things up.

  30. Joseph Ryan Says:

    Bond. Eoin Bond.

    “Without being harsh, it might be useful if people only commented on things they actually understood. Hopefully this has cleared things up.”

    As you know only too well, the issue of any covered bonds in any bank queue jumps depositors who are pushed to the end of the queue on bank failure. The assets provided as collateral reduce the remaining assets available to cover liabilities on bank failure. That this is a fundamental failure of European banking is beside the point.
    The fact that you say this particular queue jumping secured bond replaces another queue jumping secured bond (in the hands of the ECB) is irrelevant to the matter.
    Where in the prospectus for the BOI covered bond issue, will it have been a condition that BOI payoff the bond in possession of the ECB?

    The admonition that
    “it might be useful if people only commented on things they actually understood”
    would have been a very useful admonition to bankers and the financial industry a number of years ago, pre the €64 billion bailout. Coming presumably from that industry today, such an admonition, even though hard to swallow, should be taken with a grain of the very expensive salt being used to bail out that industry.

  31. Bond. Eoin Bond... Says:

    @ JR

    It was explained on the investor conference call. The essential point is that depositors are no worse off today than they were on Friday last week. A bank that can’t access liquidity is a dead duck, which isn’t a particularly good situation for depositors to find themselves in, is it? Hence the need for secured funding. If depositors don’t like the situation (which is the same as last Friday, in fact possibly better if ECB collateral reqs are more onerous than the std covered bond reqs for these investors), than they can withdraw their money tomorrow.

  32. Paul W Says:

    @ BEB
    Problem with these OBS securitisations is that they are not really OBS when the s**t hits the fan. These constructions are just that ‘constructions’….’fallible’. it can and will be better than before…….!! People like you need to believe that, and we all need to begin to do ‘the right thing’. Why is it taking so long? Denial? Survival,regardless, etc?

  33. Joseph Ryan Says:

    @Bond. Eoin Bond

    “The essential point is that depositors are no worse off today than they were on Friday last week.”

    Agreed on that. My earlier remarks were against covered bonds in general. The fact that the ECB has not put deposit insurance top of its agenda is a major contributory cause to why banks , as a result of deposit flight, have to borrow from the ECB in the first place.
    BOI and other banks seem to think that moving away from ECB ‘dependency’ is a good thing. I do not see it that way at all, regardless of what pressures the ECB attempt to put on banks. Until this crisis is fully resolved, banks should be in no way shy of telling the ECB to put up or shut in relation to bank liquidity.
    The very fact that the ECB or any central bank requires collateral, knowing full well that depositors, whose interests they supposedly protect, have no collateral is anathema to equitable thinking.

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